Costs & Taxes

 
Capital Costs
  • $50 million     -   Performing Arts Center (property tax exempt)
  • $27.4 million  -   Mixed-Use & Private Student Housing  (The estimated total private investment portion is $21.5 million.)
  • $2.6 million    -   Haymarket Plaza (will be over $4.1 million if a bridge to Phoenix Park is included)
  • $2.5 million    -   Theater Endowment Fund
  • $7.7 million    -   Parking Ramp

Total:   $90.2 million

Operating Costs

  • $???????    -   There is no operating plan. The City's share of operating loss has not been determined. The initial estimate is an annual operating loss of $300,000; major maintenance items like roof, HVAC or capital costs to upgrade/renovate the facilities are not included in that estimate.

Taxes & Financing

State:  UWEC administration is asking the state taxpayers for $25,000,000 toward the performing art center. This has not yet been approved.

County:  Eau Claire County was asked for $5,000,000. The county board decided to pledge $3,500,000 contingent on voter referendum approval (April 1, 2014). If the referendum passes, the county will borrow $3,500,000 and increase property taxes for ten years to pay back the debt.

City:  The City of Eau Claire has been asked to provide the following:

  •   $5,000,000 for the performing arts center/class room building. The city has pledged $5,000,000.
  •   $5,900,000 for the student housing/mixed use building, complete with underground student parking.
  •   $2,600,000 - $4,100,000 for the plaza located between the student housing and the performing art center.
  •   $7,700,000 for a parking ramp at the location of the current post office. The City has tentatively added the $7,700,000 project to an existing TIF district (TIF District #8 - see more about TIFs below), but has not yet included the project in the budget or authorized the funding.

     Total:  $21,200,000 to $22,700,000

The City does not have the money to honor the pledge nor money to pay for the additional requests. Therefore, it must borrow the money. It plans to use a funding method known as Tax Incremental Financing or a TIF. There is a great deal of misunderstanding about TIF funding, in particular for this project. We taxpayers have been told that we will not have to pay a cent and that it is risk free. Unfortunately, that is not the case.

Here are the Myths and Truths about TIFs:      

Myth 1:        TIF stands for This Is Free.
Truth:           It is anything but free.

TIF stands for Tax Incremental Financing. Cities use it to borrow money to renew blighted areas. The borrowed money can be spent to demolish old buildings and infrastructure and replace them with new infrastructure and new buildings.

Using a TIF, the City is betting that demolishing existing property and constructing new infrastructure and buildings will attract new business and development in a specific area. Presumably, the new buildings are more valuable than the demolished buildings and will generate additional taxes, referred to as “incremental taxes”. The incremental taxes will enable the City to repay the borrowed money, with interest. As a carrot to promote TIFs, the State of Wisconsin authorizes the City to designate the blighted area as a TIF district. The City uses 100% of the incremental property taxes generated by the new construction to repay the principal and interest. That 100% includes amounts that would otherwise be allocated to the State, the County, and the School District. With TIF funding, the State, the County, and the School District do not get a penny of the incremental tax until the City repays all of its TIF debt.

Myth 2:        TIF borrowing is risk free
Truth:           It is only risk free to the bondholders; The taxpayers guarantee payment.

TIF bonds are general obligation bonds backed by the City’s taxing authority. The City is betting on winners and losers and is making not one, but three bets. Bet 1 – Development in the district will occur; Bet 2 – Assessed value of the improved property in the district will provide a tax base sufficient to pay the principal and interest on the bond; Bet 3 - Owners of the improved property are successful and able to pay the assessed property taxes. If the City loses any one of these three bets, the taxpayers effectively guarantee that the bondholders are paid.

This is a weighty concern with the Confluence project. Only the property taxes on the $21 million student housing are available to fund the parking and site preparation for the student housing, the community arts center, and the public plaza. The arts center and public plaza are tax exempt.

Is the student housing a good bet? It is premised on the continuity of the student loan bubble. Nationwide, students owe more than one trillion dollars; many of these loans are in arrears.

The Confluence dorm will be privately owned. UW-Eau Claire will NOT guarantee its occupancy; it will fill its own dorms first. When the student loan bubble inevitably bursts, student populations are expected to decline precipitously. An off-campus, private dorm will be the last to be filled. If the private student housing is not occupied, then the private investors can’t pay the taxes to pay back the TIF loans. Then Eau Claire City taxpayers are responsible for the debt.

Housing built especially for students is another concern. Who among us wants to live in a dorm? If City taxpayers end up covering unpaid taxes, the dorm will be “a giant white elephant” that may require a complete retro-fitting to be of use to anyone.

Myth 3:        TIF projects do not entail any property tax increases to city residents.
Truth:          TIF projects all but assure increased property taxes.

Under Wisconsin law, the total property tax assessment (known as the tax levy) is fixed at a specific sum for both City and County municipalities. It can be increased (a) to cover increased general obligation debt service payments like those referenced in Myth 2, and (b) when there is an increase in the taxable property listed on the tax rolls. The latter increases are tracked via building permits and include TIF property. If new property is placed on the rolls in any given year, the City has a choice. It can either increase the levy to reflect the new property values or forego the increase forever. It is a “use it or lose” it opportunity. The resulting increased levy is then allocated to the properties outside the TIF districts, i.e., an increase in individual property taxes. The 4.6% hike in the 2014 levy was based in part on new TIF district construction.

Moreover, increases in taxes are needed to provide city services to support the new infrastructure and buildings. Remember, all of the district’s incremental taxes that normally would pay for these services are used to pay down interest and principal on the debt. Roads to the new buildings need to be maintained and plowed. Fire and police services are required. Schooling for children of families that come into the city as a result of the new activity must be financed. Additionally, special conditions must be met, e.g., RCU required a park as a condition of locating its headquarters downtown; park maintenance is $175,000 per year. Finally, any interim project that would normally be charged to the property owner as a special assessment (curb and gutter or sidewalk) must be absorbed by the City.

Myth 4:        Additional taxes are not needed to make the annual TIF debt payment.
Truth:          In the case of the Confluence project, they would definitely be needed.

Frequently, the incremental property taxes fall short of the dollars needed to cover the annual payments of principal and interest. Fully funding these payments is yet another reason for the City to increase the tax levy. In the case of the Confluence project, the property taxes on the $21 million student housing cover only about half of the annual principal and interest payment. That means that, if the project proceeds, either additional money will need to be borrowed (more debt) or the additional debt service costs will come from City taxpayers.

Myth 5:        TIF debt is repaid quickly so we taxpayers will not be at risk for very long.
Truth:          TIF debt often remains in place for decades and can be extended indefinitely.

A single TIF district can last as long as 27 years. It can be extended infinitely through creation of overlapping TIF districts such as Eau Claire’s TIF #5 and TIF #9. If the Confluence Project proceeds, the North Barstow district (RCU Headquarters) would need to be extended to 2039 – a total of 38 years. So for 37 years, all of the incremental property taxes from the new buildings, RCU’s 2004 Headquarters included, are paid to bondholders, not the City.

Myth 6:        The TIF is an investment with fabulous returns for the City, e.g., the City’s chart on its $17.3 million
                     investment in infrastructure in the North Barstow TIF District (TIF #8) shows a 177% return.

Truth:          The chart’s calculation is highly misleading. Returns are essentially non-existent.

The chart’s author calculated the return on investment (ROI) from the $40.9 million of PRIVATELY OWNED property - as if it were City property. The City’s only financial interest in the property is its ability to collect taxes on the property’s assessed value. Currently, the $30.5 million increase in building valuation is generating NO property taxes for the City. These incremental property taxes continue to be paid to the bondholders until ALL of the district’s TIF debt is repaid. Thus the City’s (to date) return is zero (negative if one considers the city services that are being provided without recompense). At the point the TIF debt is repaid, the property will generate annually .85% of the incremental valuation or $259,300. After 27 years of negative returns, the city then realizes a 1.5% per year return on its $17.3 million investment (after 37 years if the Confluence Project proceeds).

Myth 7:        Without the TIF, these projects would not be built.
Truth:          Studies indicate that most would be built, although perhaps not in the TIF district.

Without the TIF, any property taxes generated from private investment would immediately flow to the City, the County, the State, and the School District. Moreover, there would be no risk to the taxpayer if the projects did not succeed.

Myth 8:        A public/private partnership is noble and better than a private venture.
Truth:          Public/private partnership is another name for crony capitalism.

With private ventures, only the individuals involved are at risk. Their participation is voluntary. In a public/private partnership, the taxpayers become unwitting risk takers. Corruption is fostered because private parties, in particular developers, stand to gain from a transaction that is being subsidized by the taxpayer.